ECOSTAT NEWSLETTER
- November 2006 -

ECOSTAT'S ANNUAL FORECAST OF NOVEMBER
 

According to the evaluation, and model calculations of ECOSTAT Institute for Economic Analysis and Informatics the domestic GDP will increase by 3.9% this year under a vigorous European economic recuperation and the firm measures of the economic reform program, which means it is only slightly behind last year's rate of 4.1%. The level of exportation, having the most decisive impact on economic growth, is quickly increasing; however the disparity of the import and export will persist.

The Government submitted its draft 2007 budget on 31 October. The document is basically in accord with the principles and prime figures prevalent in the New Balance and Convergence Programs. A quick and significant adjustment is highly likely to be implemented; the planned 3% decrease of the deficit is achievable, while the GDP-proportionate deficit of the state budget may decrease close to 6%.

The measures to be undertaken next year include elements that guarantee both short- and long-term savings. The draft budget of the forthcoming year envisages considerable measures that are expected to be effective even in the short term. These measures include tax increases, cut-backs on price subsidies, and the restructuring of the budgetary institutions and new regulations on the related provisioning obligation. The relevant guarantees are ensured by the measures introduced in the fourth quarter of 2006, and by the unfolding processes, which are expected to result in significant savings next year.

Next year's state budget also incorporates certain reform measures, i.e. actions taken in the fields of public health service, public education and the pensions system. These measures are by far not comprehensive in nature, and in some areas even the actual goals need further clarification (e.g. the pension system), however, during the course of the forthcoming year these principles may become more crystallized, and an increasing level of public consensus - higher than that of today's - would make the reforms more established. The balancing effects of the measures to be taken are expected to become apparent in the second half of 2007, and from the beginning of 2008.

The trade cycle of world economy is expected to reach its local peak at the beginning of next year. The growth rate is primarily determined by the US domestic consumption, and the dynamic expansion in the economic performance of China and India . The economy of the European Union is characterized by short cycles. In 2007 a slightly moderate expansion of 2-2.5% is expected as opposed to the growth rate of 2.5-3% forecasted by the end of 2006. The international trend for interest escalation seems to be faltering now, however the European Central Bank may still decide to tighten the monetary conditions towards the end of the year. Beside the decelerating business prosperity, the conditions of the monetary policies in the forthcoming year will be mainly influenced by the inflation of consumables, or capital assets. The extent of the price advance in the most influential economies will be lower than expected.

The world market price of oil has been fairly volatile in the past few months: the $75.00-80.00 price per barrel of crude oil in October dropped below $60.00 by November. For 2007 this year's annual average of $65.00-70.00 is assumed for the purpose of calculation.

The real economy's data from the first half of the year are promising, the level of exportation and the industrial production reflect a dynamic growth. The market indicators represent a slightly disparaging picture, the measures included and first mentioned in the New Balance programme in June entering into force in September, or October do not have a material effect on the growth rate this year, these will mainly make an imprint on next year's results.

The dynamic growth in domestic consumption is expected to slow down towards the end of the year; it shall remit to 1.7% by the second half of the year compared to the level of 2.6% in the first half of the year. On an annual level, however, the level of household consumption will represent a 2% expansion, thus it shall exceed last year's figures. The growth rate of investments is expected to decrease significantly in comparison to the relatively high base last year, due to a reduction in state-sponsored motorway investments and the correction process carried out in the house-building sector. The level of investments in machinery is expected to exceed last year's figures by 3-4%. The inflationary pressure has been increasing in the past few months. The disinflationary trend was arrested primarily by the increase of regulated prices and the introduction of a higher VAT rate. It is to be noted that the price level of services is rising almost continually, and the price level of consumables is growing steadily too. The rate of inflation was foreseen to be increasing during the second half of the year due to the weakening exchange rate, the price increase of basic commodities at the beginning of the year, and due to languishing competition. The recovery of prices in 2006 will turn out to be slightly higher than in the previous year, rate of increase may reach 3.8%. The deficit of the state budget corrected at mid-year seems to be sustainable; its GDP-proportionate rate is expected to be around 10%.  The joint deficit of the current account and the capital balance will be close to last year's figures, i.e. it may somewhat exceed 6% of the GDP.

The industrial output has become 10.6% higher in the first eight months of 2006. The export of the processing industry continues to be a decisive factor, while the level of industrial export has grown by 13.9% during the same period. In 2006 the production of the sector may increase by 8.5% compared to the output of 7.3% in the previous year. The dynamic growth in the exportation of the processing industry shall persist throughout the year 2006, and next year's prospects are also looking very promising. A certain deceleration of investments is reflected in the relatively weak performance of the construction industry. The slow-down of expansion in the construction industry remains characteristic throughout the whole year. While in 2005 the increase in production amounted to 16.1%, there was a 1.4% drop in the output in the first eight months of 2006. The state budget's increasingly moderate demands for investments and the diminishing interest of the households in housing projects will both remain decisive factors in the following year, so the output of the construction industry is expected to present a moderate growth even if compared to this year's minimal basis. The planned rectifying measures of the central budget will primarily temper the consumption of households; however, through the diminishing demand of the state budget, these measures are expected to have a restrictive effect on the overall domestic consumption, too. The question is what exportation possibilities will be presented under the languishing external demands.

As a consequence of the declining European economic boom and of the government's firm rectifying measures, the growth rate of the Hungarian economy shall slow down significantly in 2007. On the basis of the current conditions all we can say is that next year's output figures will be 2.5-2.8% higher than this year's results. According to the draft budgetary act next year the deficit is mainly expected to decrease as a result of the increase in revenues, but once the reform processes have commenced the effects of the long-term reductions in expenditures will become prevalent.

The strained political atmosphere of the past few weeks seems to be dissolving now, on the basis of the increasingly composed statements of last week we can say that a continued political stabilization is possible, and the implementation of the draft budget developed in line with the convergence program, and - by the realization of the planned reforming steps - most of the 2007 convergence targets are achievable. Any further protraction of the reforms or any further delays in the implementation of the planned measures would effectuate further restrictive measures to be able to achieve the desired equilibrium.

The European Commission issued its autumn report on 7 November. According to their prognosis for 2007 the GDP growth rates have improved in 21 member states compared to the assumptions in the spring report, whereas in Hungary the growth rate has fallen. The highest level of state budget deficit is also associated with Hungary . With regard to the data presented on Hungary , Joaquín Almunia, European Union Commissioner, stated that they had not taken into consideration some of the measures that have not been officially reported yet, consequently, they had not taken into account the 2007 budget, either. Brussels shall continue to monitor the Hungarian situation, similarly to any other countries potentially in violation of the deficit limit. (As a matter of fact, the data included in the report are hardly different from the targets specified in the Convergence Program.)

The central bank was forced to raise the interest rates due to the hectic fluctuations of the rate of exchange, but mainly due to the increasing rate of inflation. The base rate was increased to 8%. Although the targeted level of inflation for next year was increased as a result of the emergence of temporary budgetary measures, the medium-term inflation target is not in a secure position either. The exchange rate may become stabilized under a creditable budgetary policy only. In the forthcoming period it will become even more important to see what impacts the temporary effects and single measures will have on the rate of inflation, and to what extent the "actual" inflationary pressure become prevalent. Our prognosis assumes that in 2007 the rate of inflation will be around 6.5% due to the lingering effect of the government's stabilization package, and the prospective pricing measures and market price advances. The increase in inflation without any related changes in taxation increases the likelihood of the central bank's increasing its interest rate. However, on the basis of the existing conditions, it is to be taken into consideration that the top of the rate rise period has been reached and the base rate may decrease again from 2007 onwards and may approach the level of 6%. The annual FX rate in 2006 has been around 265.00 HUF/EUR; however, in 2007 it is expected to decrease to 258-260.00 HUF/EUR, while in the course of the year it may reach 250.00 HUF/EUR.

(The next prognosis of ECOSTAT shall be published in our fourth quarter MONITOR report, prospectively between 18-21 December 2006!)